UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2007
Commission file number: 001-15985
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
MAIN STREET
MORRISVILLE, VT 05661
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. (See definition of "accelerated
filer and large accelerated filer", in Rule 12b-2 of the Exchange Act). (Check
One):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes _____ No __X__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of
July 30, 2007:
Common Stock, $2 par value 4,519,847 shares
1
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Consolidated Financial Statements Union Bankshares,
Inc. and Subsidiary
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 36
Item 4. Controls and Procedures. 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 36
Item 1A. Risk Factors. 36
Item 2. Unregistered Sales of Securities and Use of Proceeds. 36
Item 4. Submission of Matters to Vote of Security Holders. 37
Item 6. Exhibits. 37
Signatures 37
2
Part l Financial Information
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2007 2006
---- ----
Assets (Dollars in thousands)
Cash and due from banks $ 12,200 $11,694
Federal funds sold and overnight deposits 5,064 9,263
-------- --------
Cash and cash equivalents 17,264 20,957
Interest bearing deposits in banks 10,439 5,417
Investment securities available-for-sale 26,682 23,682
Loans held for sale 3,166 3,750
Loans 303,382 313,822
Allowance for loan losses (3,326) (3,338)
Unearned net loan fees (108) (120)
-------- --------
Net loans 299,948 310,364
Accrued interest receivable 2,168 2,001
Premises and equipment, net 6,073 6,080
Other assets 9,960 8,898
-------- --------
Total assets $375,700 $381,149
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing $ 46,944 $ 54,875
Interest bearing 261,921 264,947
-------- --------
Total deposits 308,865 319,822
Borrowed funds 18,922 14,596
Liability for pension benefits 1,526 1,317
Accrued interest and other liabilities 4,691 3,491
-------- --------
Total liabilities 334,004 339,226
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common stock, $2.00 par value; 7,500,00 shares authorized
at 6/30/07 and 5,000,000 at 12/31/06; 4,918,611 shares
issued at 6/30/07 and 12/31/06 9,837 9,837
Paid-in capital 155 150
Retained earnings 35,386 35,203
Treasury stock at cost; 397,964 shares at 6/30/07 and 386,634
at 12/31/06 (2,507) (2,264)
Accumulated other comprehensive loss (1,175) (1,003)
-------- --------
Total stockholders' equity 41,696 41,923
-------- --------
Total liabilities and stockholders' equity $375,700 $381,149
======== ========
See accompanying notes to the unaudited consolidated financial statements.
3
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands except Per Share Data)
Interest income
Interest and fees on loans $ 5,944 $ 5,854 $ 11,844 $ 11,305
Interest on debt securities
Taxable 256 235 491 533
Tax exempt 50 49 96 98
Dividends 27 22 57 45
Interest on federal funds sold and overnight deposits 77 17 180 43
Interest on interest bearing deposits in banks 122 68 196 147
--------- --------- --------- ---------
Total interest income 6,476 6,245 12,864 12,171
--------- --------- --------- ---------
Interest expense
Interest on deposits 1,880 1,404 3,665 2,644
Interest on borrowed funds 179 206 369 413
--------- --------- --------- ---------
Total interest expense 2,059 1,610 4,034 3,057
--------- --------- --------- ---------
Net interest income 4,417 4,635 8,830 9,114
Provision for loan losses - 105 45 150
--------- --------- --------- ---------
Net interest income after provision for loan losses 4,417 4,530 8,785 8,964
--------- --------- --------- ---------
Noninterest income
Trust income 83 74 167 145
Service fees 854 787 1,650 1,493
Net gains on sales of investment securities 47 14 37 17
Net gains on sales of loans held for sale 23 27 50 119
Other income 120 101 166 175
--------- --------- --------- ---------
Total noninterest income 1,127 1,003 2,070 1,949
--------- --------- --------- ---------
Noninterest expenses
Salaries and wages 1,549 1,511 3,127 3,005
Pension and employee benefits 520 552 1,180 1,129
Occupancy expense, net 214 198 434 401
Equipment expense 281 261 543 517
Other expenses 989 929 1,937 1,796
--------- --------- --------- ---------
Total noninterest expense 3,553 3,451 7,221 6,848
--------- --------- --------- ---------
Income before provision for income taxes 1,991 2,082 3,634 4,065
Provision for income taxes 505 548 913 1,058
--------- --------- --------- ---------
Net income $ 1,486 $ 1,534 $ 2,721 $ 3,007
========= ========= ========= =========
Earnings per common share $ 0.33 $ 0.34 $ 0.60 $ 0.66
========= ========= ========= =========
Weighted average number of common
shares outstanding 4,529,158 4,540,828 4,530,330 4,541,166
========= ========= ========= =========
Dividends per common share $ 0.28 $ 0.26 $ 0.56 $ 0.52
========= ========= ========= =========
See accompanying notes to the unaudited consolidated financial statements.
4
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
------------------- Accumulated
Shares, other Total
net of Paid-in Retained Treasury comprehensive stockholders'
Treasury Amount capital earnings stock loss equity
-------- ------ ------- -------- -------- ------------- -------------
(Dollars in thousands)
Balances, December 31, 2006 4,531,977 $9,837 $150 $35,203 $(2,264) $(1,003) $41,923
Comprehensive income:
Net income - - - 2,721 - - 2,721
Change in net unrealized loss on
investment securities
available-for-sale, net of
reclassification adjustment and
tax effects - - - - - (172) (172)
-------
Total comprehensive income 2,549
-------
Cash dividends declared
($0.56 per share) - - - (2,538) - - (2,538)
Issuance of stock options - - 5 - - - 5
Purchase of treasury stock (11,330) - - - (243) - (243)
--------- ------ ---- ------- ------- ------- -------
Balances, June 30, 2007 4,520,647 $9,837 $155 $35,386 $(2,507) $(1,175) $41,696
========= ====== ==== ======= ======= ======= =======
See accompanying notes to the unaudited consolidated financial statements.
5
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
----------------------
June 30, June 30,
2007 2006
---- ----
(Dollars in thousands)
Cash Flows From Operating Activities
Net Income $ 2,721 $ 3,007
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 380 384
Provision for loan losses 45 150
Credit for deferred income taxes (170) (25)
Net amortization of investment securities 7 34
Equity in losses of limited partnerships 133 165
Issuance of stock options 5 5
Write-downs of other real estate owned 48 -
Decrease in unamortized loan fees (12) (22)
Proceeds from sales of loans held for sale 9,297 10,949
Origination of loans held for sale (8,663) (6,018)
Net gains on sales of loans held for sale (50) (119)
Net gains on sales of investment securities (37) (17)
Net gains on disposals of premises and equipment - (6)
Net gains on sales of repossessed property (4) -
Net gains on sales of other real estate owned (28) -
(Increase) decrease in accrued interest receivable (167) 400
Increase in other assets (76) (178)
Increase in income taxes 47 28
Decrease in accrued interest payable (58) (37)
Increase in other liabilities 874 532
------- -------
Net cash provided by operating activities 4,292 9,232
------- -------
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 395 1,890
Purchases (5,417) -
Investment securities available-for-sale
Sales 501 6,028
Maturities, calls and paydowns 1,250 2,089
Purchases (4,982) -
Net redemption (purchase) of Federal Home Loan Bank stock 82 (248)
Net decrease (increase) in loans 10,254 (5,328)
Recoveries of loans charged off 27 48
Purchases of premises and equipment (396) (605)
Investments in limited partnerships (356) (347)
6
Six Months Ended
----------------------
June 30, June 30,
2007 2006
---- ----
(Dollars in thousands)
Proceeds from sales of other real estate owned 23 -
Proceeds from sales of premises and equipment 23 9
Proceeds from sales of repossessed property 23 1
------- -------
Net cash provided by investing activities 1,427 3,537
------- -------
Cash Flows From Financing Activities
Net increase in borrowings outstanding 4,326 4,084
Net decrease in noninterest bearing deposits (7,931) (5,990)
Net decrease in interest bearing deposits (3,026) (10,575)
Purchase of treasury stock (243) (42)
Dividends paid (2,538) (2,362)
------- -------
Net cash used in financing activities (9,412) (14,885)
------- -------
Decrease in cash and cash equivalents (3,693) (2,116)
Cash and cash equivalents
Beginning 20,957 14,208
------- -------
Ending $17,264 $12,092
======= =======
Supplemental Disclosures of Cash Flow Information
Interest paid $ 4,092 $ 3,094
======= =======
Income taxes paid $ 1,035 $ 1,055
======= =======
Supplemental Schedule of Noncash Investing and
Financing Activities
Change in unrealized losses on investment securities
available-for-sale $ (261) $ (413)
======= =======
Other real estate acquired in settlement of loans $ 197 $ 101
======= =======
Repossessed property acquired in settlement of loans $ 20 $ 1
======= =======
Investment in limited partnerships acquired by capital
contributions payable $ 902 -
======= =======
Loans originated to finance the sale of other real estate owned $ 115 -
======= =======
See accompanying notes to the unaudited consolidated financial statements.
7
UNION BANKSHARES, INC. AND SUBSIDIARY
Note 1. Basis of Presentation
The accompanying interim unaudited consolidated financial statements of Union
Bankshares, Inc. (the Company) as of June 30, 2007 and 2006, and for the three
and six months then ended have been prepared in conformity with U.S. generally
accepted accounting principles (GAAP), general practices within the banking
industry, and the accounting policies described in the Company's Annual Report
to Shareholders and Annual Report on Form 10-K for the year ended December 31,
2006. In the opinion of Company's management, all adjustments, consisting only
of normal recurring adjustments and disclosures necessary for a fair
presentation of the information contained herein have been made. This
information should be read in conjunction with the Company's 2006 Annual Report
to Shareholders, 2006 Annual Report on Form 10-K, and current reports on Form
8-K. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full fiscal year
ending December 31, 2007, or any other interim period.
Certain amounts in the 2006 consolidated financial statements have been
reclassified to conform to the 2007 presentation.
Note 2. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Company's financial
condition or results of operations.
Note 3. Per Share Information
Earnings per common share amounts are computed based on the weighted average
number of shares of common stock outstanding during the period and reduced for
shares held in treasury. The assumed conversion of available stock options does
not result in material dilution.
Note 4. New Accounting Pronouncements
In February 2007, the Financial Accounting Board's (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge accounting provisions. This Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. This Statement does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value. This
Statement does not establish requirements for recognizing and measuring
dividend income, interest income, or interest expense. This Statement does not
eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included
in SFAS No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair
Value of Financial Instruments. This Statement is effective prospectively for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact of this new standard on the
Company's consolidated financial statements but does not expect that such
impact will be material.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value
in GAAP, and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will change current practice. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating
the impact of this new standard to determine its effects on the Company's
consolidated financial statements but does not expect that such impact will be
material.
8
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. The Statement requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in certain situations. It
requires all separately recognized servicing assets and liabilities to be
initially measured at fair value, if practicable. It permits an entity to
choose either the amortization method or the fair value measurement method for
each class of separately recognized servicing assets and liabilities and
requires additional disclosures in the financial statements under the fair
value measurement method. The Company adopted SFAS No.156 effective January 1,
2007 and will continue with the amortization method of servicing rights which
has no additional impact on the Company's financial position or results of
operations.
Note 5. Defined Benefit Pension Plan
Union Bank (Union), the Company's bank subsidiary, sponsors a noncontributory
defined benefit pension plan covering all eligible employees. The plan provides
defined benefits based on years of service and final average salary.
Net periodic pension benefit cost for the three and six months ended June 30,
2007 and 2006 consisted of the following components:
Three Months Ended Six Months Ended
------------------ ----------------
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands)
Service cost $ 127 $ 132 $ 259 $ 242
Interest cost on projected benefit obligation 154 144 302 275
Expected return on plan assets (151) (118) (301) (242)
Amortization of prior service cost 1 2 3 3
Amortization of net loss 5 21 10 42
----- ----- ----- -----
Net periodic benefit cost $ 136 $ 181 $ 273 $ 320
===== ===== ===== =====
Note 6. Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for the
three and six months ended June 30, 2007 and 2006 are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands)
Unrealized holding losses on investment
securities available-for-sale $(362) $(293) $(224) $(396)
Reclassification adjustment for net gains
realized in income (47) (14) (37) (17)
----- ----- ----- -----
Net unrealized losses (409) (307) (261) (413)
Tax effect (139) (104) (89) (140)
----- ----- ----- -----
Net of tax amount $(270) $(203) $(172) $(273)
===== ===== ===== =====
Note 7. Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS No. 109 (FIN 48),
on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Based on management's evaluation, management has concluded that there are no
significant uncertain tax positions requiring recognition in the Company's
financial statements. Although the Company is not currently the subject of a
tax audit by the Internal Revenue Service (IRS), the Company's tax years ending
December 31, 2003 through 2006 are open to audit by the IRS under the
applicable statute of limitations.
9
The Company may from time to time be assessed interest and/or penalties by
major tax jurisdictions, although any such assessments historically have been
minimal and immaterial to the Company's financial results. In the event that
the Company receives an assessment for interest and/or penalties, it will be
classified in the financial statements as other expenses.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis by management focuses on those factors
that had a material effect on Union Bankshares, Inc.'s (Company's) financial
position as of June 30, 2007, and as of December 31, 2006, and its results of
operations for the three and six months ended June 30, 2007 and 2006. This
discussion is being presented to provide a narrative explanation of the
financial statements and should be read in conjunction with the consolidated
financial statements and related notes and with other financial data appearing
elsewhere in this filing and with the Company's Annual Report on Form 10-K for
the year ended December 31, 2006. In the opinion of Company's management, the
interim unaudited data reflects all adjustments, consisting only of normal
recurring adjustments, and disclosures necessary to fairly present the
Company's consolidated financial position and results of operations for the
interim period. Management is not aware of the occurrence of any events after
June 30, 2007, which would materially affect the information presented.
CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may
include financial projections, statements of plans and objectives for future
operations, estimates of future economic performance and assumptions relating
thereto. The Company may include forward-looking statements in its filings with
the Securities and Exchange Commission (SEC), in its reports to stockholders,
including this Quarterly Report, in other written materials, and in statements
made by senior management to analysts, rating agencies, institutional
investors, representatives of the media and others.
Forward-looking statements reflect management's current expectations and are
subject to uncertainties, both general and specific, and risk exists that those
predictions, forecasts, projections and other estimates contained in
forward-looking statements will not be achieved. When management uses any of
the words "believes," "expects," "anticipates," "intends," "plans," "seeks,"
"estimates", or similar expressions, they are making forward-looking
statements. Many possible events or factors, including those beyond the control
of management, could affect the future financial results and performance of the
Company. This could cause results or performance to differ materially from
those expressed in forward-looking statements. The possible events or factors
that might affect forward-looking statements include, but are not limited to,
the following:
o uses of monetary, fiscal, and tax policy by various governments;
o political, legislative, or regulatory developments in Vermont, New
Hampshire, or the United States including changes in laws concerning
accounting, taxes, financial reporting, banking, and other aspects of the
financial services industry;
o developments in general economic or business conditions nationally, in
Vermont, or in northern New Hampshire, including interest rate
fluctuations, market fluctuations and perceptions, job creation and
unemployment rates, ability to attract new business, and inflation and
their effects on the Company or its customers;
o changes in the competitive environment for financial services
organizations, including increased competition from tax-advantaged credit
unions and out-of-market competitors offering financial services over the
internet;
o the Company's ability to attract and retain key personnel;
10
o changes in technology, including demands for greater automation which
could present operational issues or significant capital outlays;
o acts or threats of terrorism or war, and actions taken by the United
States or other governments that might adversely affect business or
economic conditions for the Company or its customers;
o adverse changes in the securities market which could adversely affect the
value of the Company's stock;
o any actual or alleged conduct which could harm the Company's reputation;
o natural or other disasters which could affect the ability of the Company
to operate under normal conditions;
o the Company's ability to retain and attract deposits;
o illegal acts of theft or fraud perpetuated against the bank or its
customers;
o unanticipated lower revenues or increased cost of funds, loss of
customers or business, or higher operating expenses;
o the failure of assumptions underlying the establishment of the allowance
for loan losses and estimations of values of collateral and various
financial assets and liabilities;
o the amount invested in new business opportunities and the timing of these
investments;
o the failure of actuarial, investment, work force, salary, and other
assumptions underlying the establishment of reserves for future pension
costs or changes in legislative or regulatory requirements;
o future cash requirements might be higher than anticipated due to loan
commitments or unused lines of credit being drawn upon or depositors
withdrawing their funds;
o assumptions made regarding interest rate movement and sensitivity could
vary substantially if actual experience differs from historical
experience which could adversely affect the Company's results of
operations; and
o the creditworthiness of current loan customers is different from
management's understanding or changes dramatically and therefore the
allowance for loan losses becomes inadequate.
When evaluating forward-looking statements to make decisions with respect to
the Company, investors and others are cautioned to consider these and other
risks and uncertainties and are reminded not to place undue reliance on such
statements. Forward-looking statements speak only as of the date they are made
and the Company undertakes no obligation to update them to reflect new or
changed information or events, except as may be required by federal securities
laws.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of the Company's financial statements. Certain
accounting policies involve significant judgments and assumptions by management
which have a material impact on the reported amount of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities in the consolidated financial statements and accompanying notes.
The SEC has defined a company's critical accounting policies as the ones that
are most important to the portrayal of the company's financial condition and
results of operations, and which require the company to make its most difficult
and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition, the Company
has identified the accounting policies and judgments most critical to the
Company. The judgments and assumptions used by management are based on
historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
made by management, actual results could differ from estimates and have a
material impact on the carrying value of assets, liabilities, or the results of
operations of the Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience as well as
other factors including the effect of changes in the local real estate market
on collateral values, the effect on the loan portfolio of current economic
indicators and their probable impact on borrowers and changes in delinquent,
nonperforming or impaired loans. Changes in these factors may cause
management's estimate of the allowance for loan losses to increase or decrease
and result in adjustments to the
11
Company's provision for loan losses in future periods. For additional
information see, FINANCIAL CONDITION - Allowance for Loan Losses below.
The Company's pension benefit obligations and net periodic benefit cost are
actuarially determined based on the following assumptions: discount rate,
estimated future return on plan assets, wage base rate, anticipated mortality
rates, Consumer Price Index rate, rate of increase in compensation levels,
anticipated service periods and retirement dates. The determination of the
pension benefit obligations and net periodic benefit cost is a critical
accounting estimate as it requires the use of estimates and judgment related to
the amount and timing of expected future cash out flows for benefit payments
and cash in flows for maturities and returns on plan assets. Changes in
estimates and assumptions could have a material impact to the Company's
financial condition or results of operations.
The Company also has other key accounting policies, which involve the use of
estimates, judgments and assumptions that are significant to understanding the
Company's results of operation and financial condition, including the valuation
of deferred tax assets and analysis of investment securities. Although
management believes that its estimates, assumptions and judgments are
reasonable, they are based upon information presently available. Actual results
may differ significantly from these estimates under different assumptions,
judgments or conditions.
OVERVIEW
The Company's net income was $1.49 million for the quarter ended June 30, 2007,
compared with net income of $1.53 million for the same period in 2006, or a
3.1% decrease between years. The Company faced a challenging interest rate
environment, and although total interest income increased by $231 thousand, or
3.7% in 2007 versus the second quarter of 2006, this increase was more than
offset by an increase in interest expense of $449 thousand, or 27.9% between
periods. The prime rate has remained flat at 8.25% since June 29, 2006. The
yield curve has started to trend toward a positive bias with short term
interest rates being lower than long term rates towards the end of the second
quarter for the first time since August 2006. The Company had a decrease in its
net interest margin from 5.46% for the second quarter of 2006 to 5.14% for the
second quarter of 2007.
The Company's total assets decreased from $381.1 million at December 31, 2006,
to $375.7 million at June 30, 2007 or a decrease of 1.4%. Deposits decreased
from $319.8 million at December 31, 2006 to $308.9 million at June 30, 2007, or
a decrease of 3.4%. The contraction in both total assets and total deposits is
a seasonal trend for the Company as Vermont municipalities are required by
state law to be out of debt, for tax anticipation borrowings, at least one day
per year and the majority redeem their certificates of deposit and pay down
their loans on June 30th each year. Total loans including loans held for sale
decreased 3.5% from $317.6 million at December 31, 2006 to $306.5 million at
June 30, 2007, of which $7.6 million is attributable to the seasonal drop in
municipal loans. The municipal loan balances were up $6.7 million the first
business day of the third quarter and have risen over $750 thousand since.
Municipal certificates of deposit dropped $9.6 million on the last business day
of the second quarter and are now at a higher level than before the seasonal
drop.
Noninterest income is up $124 thousand, or 12.4% for the second quarter of 2007
versus 2006 which is primarily due to increases in overdraft fees, merchant
services income and ATM/Debit card fees. Noninterest expenses are up $102
thousand, or 3.0% for the second quarter of 2007 to $3.55 million from $3.45
million for the second quarter of 2006, primarily due to the costs to bring or
maintain properties in other real estate owned and the expiration of Vermont
state franchise tax credits.
12
The following unaudited per share information and key ratios depict several
measurements of performance or financial condition for or at the three and six
months ended June 30, 2007 and 2006, respectively:
Quarter Ended June 30, Year to Date June 30,
---------------------- ---------------------
2007 2006 2007 2006
---- ---- ---- ----
Return on average assets (ROA) (1) 1.57% 1.65% 1.44% 1.62%
Return on average equity (ROE) (1) 14.31% 14.79% 13.08% 14.49%
Net interest margin (1)(2) 5.14% 5.46% 5.18% 5.37%
Efficiency ratio (3) 63.48% 60.43% 65.25% 61.07%
Net interest spread (4) 4.59% 5.00% 4.61% 4.93%
Loan to deposit ratio 99.25% 103.66% 99.25% 103.66%
Net loan charge-offs (recoveries) to average loans
not held for sale (1) 0.02% 0.02% 0.04% (0.01%)
Allowance for loan losses to loans not
held for sale 1.10% 1.06% 1.10% 1.06%
Non-performing assets to total assets 1.05% 1.02% 1.05% 1.02%
Equity to assets 11.10% 11.56% 11.10% 11.56%
Total capital to risk weighted assets 17.20% 17.67% 17.20% 17.67%
Book value per share $9.22 $9.24 $9.22 $9.24
Earnings per share $0.33 $0.34 $0.60 $0.66
Dividends paid per share $0.28 $0.26 $0.56 $0.52
Dividend payout ratio (5) 84.85% 76.47% 93.33% 78.79%
--------------------
(1) Annualized
(2) The ratio of tax equivalent net interest income to average earning assets.
(3) The ratio of noninterest expense to net interest income plus noninterest income excluding
securities gains and losses.
(4) The difference between the average rate earned on assets minus the average rate paid on
liabilities.
(5) Cash dividends declared and paid per share divided by consolidated net income per share.
The prime interest rate has remained flat at 8.25% since June 29, 2006. The
prime rate was 7.25% as of December 31, 2005 and rose twice during the first
quarter and twice during the second quarter in 2006, by 25 basis points each
time to reach 8.25% at June 30, 2006. The current prime rate of 8.25% is the
highest the prime rate has been since March 20, 2001. The Company's net
interest margin decreased 19 basis points and net interest spread declined 32
basis points during the first half of 2007 compared to the first half of 2006.
The decline in the net interest spread was primarily the result of average
interest rates paid on time and money market deposits rising as traditional and
nontraditional financial institutions and tax-exempt credit unions in the
Company's market compete aggressively for core deposit dollars, resulting in
pricing pressures.
RESULTS OF OPERATIONS
Net Interest Income. The largest component of the Company's operating income is
net interest income, which is the difference between interest and dividend
income received from interest-earning assets and the interest expense paid on
interest-bearing liabilities. The Company's net interest income decreased $218
thousand, or 4.7%, to $4.42 million for the three months ended June 30, 2007,
from $4.64 million for the three months ended June 30, 2006. The net interest
spread decreased 41 basis points to 4.59% for the three months ended June 30,
2007, from 5.00% for the three months ended June 30, 2006. As money market and
time deposit "specials" abounded throughout the market place, interest rates
paid to attract these deposits moved up more quickly than rates earned on loans
and other earning assets. The net interest margin for the second quarter of
2007 decreased 32 basis points to 5.14% from the 2006 period at 5.46%. A
decrease in prime rate would not necessarily be beneficial to the Company in
the near term, see "OTHER FINANCIAL CONSIDERATIONS - Market Risk and Asset and
Liability Management."
13
Yields Earned and Rates Paid. The following table shows, for the periods
indicated, the total amount of income recorded from interest-earning assets and
the related average yields, the interest expense associated with
interest-bearing liabilities, the related average rates paid, and the relative
net interest spread and net interest margin. Yield and rate information is
calculated on an annualized tax equivalent basis. Yield and rate information
for a period is average information for the period, and is calculated by
dividing the annualized income or expense item for the period by the average
balance of the appropriate balance sheet item during the period. Net interest
margin is annualized tax equivalent net interest income divided by average
interest-earning assets. Nonaccrual loans are included in asset balances for
the appropriate periods, but recognition of interest on such loans is
discontinued and any remaining accrued interest receivable is reversed in
conformity with federal regulations.
Three months ended June 30,
2007 2006
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- ------- -------
(Dollars in thousands)
Average Assets:
Federal funds sold and
overnight deposits $ 5,775 $ 77 5.20% $ 1,445 $ 17 4.78%
Interest bearing deposits in banks 10,357 122 4.75% 7,060 68 3.84%
Investment securities (1), (2) 26,905 310 4.93% 26,380 288 4.70%
Loans, net (1), (3) 307,763 5,944 7.85% 310,807 5,854 7.64%
FHLB of Boston stock 1,385 23 6.68% 1,487 18 4.81%
-------- ------ ----- -------- ------ -----
Total interest-earning assets (1) 352,185 6,476 7.49% 347,179 6,245 7.31%
Cash and due from banks 9,969 9,778
Premises and equipment 6,114 6,173
Other assets 9,422 7,729
-------- --------
Total assets $377,690 $370,859
======== ========
Average Liabilities and Stockholders' Equity:
NOW accounts $ 52,848 $ 108 0.82% $ 51,653 $ 91 0.71%
Savings/money market accounts 93,537 416 1.79% 104,035 431 1.66%
Time deposits 123,720 1,356 4.40% 104,912 882 3.37%
Borrowed funds 14,455 179 4.91% 17,645 206 4.63%
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities 284,560 2,059 2.90% 278,245 1,610 2.31%
Non-interest bearing deposits 45,499 46,851
Other liabilities 6,098 4,278
-------- --------
Total liabilities 336,157 329,374
Stockholders' equity 41,533 41,485
-------- --------
Total liabilities and
stockholders' equity $377,690 $370,859
======== ========
Net interest income $4,417 $4,635
====== ======
Net interest spread (1) 4.59% 5.00%
===== =====
Net interest margin (1) 5.14% 5.46%
===== =====
--------------------
(1) Average yields reported on a tax-equivalent basis.
(2) Average balances of investment securities are calculated on the amortized cost basis.
(3) Includes loans held for sale and is net of unearned income and allowance for loan losses.
14
Six months ended June 30,
2007 2006
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- ------- -------
(Dollars in thousands)
Average Assets:
Federal funds sold and
overnight deposits $ 6,920 $ 180 5.18% $ 1,879 $ 43 4.57%
Interest bearing deposits in banks 8,583 196 4.61% 7,612 147 3.88%
Investment securities (1), (2) 25,884 594 4.91% 28,945 643 4.75%
Loans, net (1), (3) 308,599 11,844 7.84% 308,358 11,305 7.47%
FHLB of Boston stock 1,395 50 7.11% 1,442 33 4.58%
-------- ------- ----- -------- ------- -----
Total interest-earning assets (1) 351,381 12,864 7.49% 348,236 12,171 7.14%
Cash and due from banks 10,184 10,064
Premises and equipment 6,093 6,116
Other assets 9,140 7,912
-------- --------
Total assets $376,798 $372,328
======== ========
Average Liabilities and Stockholders' Equity:
NOW accounts $ 51,608 $ 202 0.79% $ 51,957 $ 173 0.67%
Savings/money market accounts 94,216 825 1.77% 105,697 822 1.57%
Time deposits 121,244 2,638 4.39% 103,166 1,649 3.22%
Borrowed funds 14,909 369 4.92% 17,934 413 4.58%
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities 281,977 4,034 2.88% 278,754 3,057 2.21%
Non-interest bearing deposits 47,480 47,928
Other liabilities 5,728 4,131
-------- --------
Total liabilities 335,185 330,813
Stockholders' equity 41,613 41,515
-------- --------
Total liabilities and
stockholders' equity $376,798 $372,328
======== ========
Net interest income $ 8,830 $ 9,114
======= =======
Net interest spread (1) 4.61% 4.93%
===== =====
Net interest margin (1) 5.18% 5.37%
===== =====
--------------------
(1) Average yields reported on a tax-equivalent basis.
(2) Average balances of investment securities are calculated on the amortized cost basis.
(3) Includes loans held for sale and is net of unearned income and allowance for loan losses.
Rate/Volume Analysis. The following tables describe the extent to which changes
in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities information is
provided on changes attributable to:
o changes in volume (change in volume multiplied by prior rate);
o changes in rate (change in rate multiplied by prior volume); and
o total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate.
15
Three Months Ended June 30, 2007
Compared to
Three Months Ended June 30, 2006
Increase/(Decrease) Due to Change In
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 58 $ 2 $ 60
Interest bearing deposits in banks 36 18 54
Investment securities 6 16 22
Loans, net (62) 152 90
FHLB of Boston stock (1) 6 5
---- ----- -----
Total interest-earning assets $ 37 $ 194 $ 231
Interest-bearing liabilities:
NOW accounts $ 2 $ 15 $ 17
Savings/money market accounts (46) 31 (15)
Time deposits 176 298 474
Borrowed funds (39) 12 (27)
---- ----- -----
Total interest-bearing liabilities $ 93 $ 356 $ 449
---- ----- -----
Net change in net interest income $(56) $(162) $(218)
==== ===== =====
Six Months Ended June 30, 2007
Compared to
Six Months Ended June 30, 2006
Increase/(Decrease) Due to Change In
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $130 $ 7 $ 137
Interest bearing deposits in banks 20 29 49
Investment securities (72) 23 (49)
Loans, net 9 530 539
FHLB of Boston stock (1) 18 17
---- ----- -----
Total interest-earning assets $ 86 $ 607 $ 693
Interest-bearing liabilities:
NOW accounts $ (1) $ 30 $ 29
Savings/money market accounts (94) 97 3
Time deposits 323 666 989
Borrowed funds (72) 28 (44)
---- ----- -----
Total interest-bearing liabilities $156 $ 821 $ 977
---- ----- -----
Net change in net interest income $(70) $(214) $(284)
==== ===== =====
Three months Ended June 30, 2007, compared to Three months Ended June 30, 2006.
Interest and Dividend Income. The Company's interest and dividend income
increased $231 thousand, or 3.7%, to $6.48 million for the three months ended
June 30, 2007, from $6.25 million for the three months ended June 30, 2006,
with average earning assets increasing $5.0 million, or 1.4%, to $352.2 million
for the three months ended June 30, 2007, from $347.2 million for the three
months ended June 30, 2006. The increase in interest income resulting from the
rise in average earning assets was augmented by the higher rates earned on all
categories of earning assets in 2007 versus 2006. Average loans approximated
$307.8 million at an average yield of 7.85% for the three months ended June 30,
2007, down $3.0 million from $310.8 million at an average yield of 7.64% for
the three months ended June 30, 2006, or a 0.98% decrease in average volume and
a 21 basis point increase in yield. Loan demand has slowed down during 2007
especially for residential mortgages and construction loans.
16
The average balance of investments (including mortgage-backed securities)
increased $525 thousand or 2.0%, to $26.9 million for the three months ended
June 30, 2007, from $26.4 million for the three months ended June 30, 2006. The
average level of interest bearing deposits in banks for the quarter was $10.4
million up $3.3 million or 46.7% from the 2006 average level of $7.1 million,
as FDIC insured certificates of deposit in other financial institutions was one
of the highest yielding investment options available. The increase in the
investment portfolio and interest bearing deposits in banks from the second
quarter of 2006 reflects slowing loan demand. The average level of federal
funds sold and overnight deposits increased $4.3 million, to $5.8 million for
the three months ended June 30, 2007, from $1.4 million for the three months
ended June 30, 2006. The inverted yield curve through the majority of the
quarter is evident by the yield earned on Federal Funds sold and overnight
deposits of 5.20%. Interest income from nonloan instruments increased $141
thousand or 36.1% between periods, with $532 thousand for the second quarter of
2007 and $391 thousand for the same period of 2006, reflecting the overall
increases in yields and volume.
Interest Expense. The Company's interest expense increased $449 thousand, or
27.9%, to $2.06 million for the three months ended June 30, 2007, from $1.61
million for the three months ended June 30, 2006, of which $93 thousand was a
result of the increase in volume while the remaining $356 thousand increase was
due to rate increases fueled by strong competition for deposit dollars.
Interest expense on deposits increased $476 thousand or 33.9% to $1.88 million
for the quarter ended, June 30, 2007 from $1.40 million for the quarter ended,
June 30, 2006. Competition for deposits has remained strong. Management
believes consumers have become more rate sensitive over the last eighteen
months due to advertised "specials" and the proliferation of nonlocal financial
institutions trying to gather deposits throughout the Company's market area.
Average time deposits rose to $123.7 million for the three months ended June
30, 2007, from $104.9 million for the three months ended June 30, 2006, or an
increase of $18.8 million or 17.9%. While some of these deposits are new funds
for the Company, there has been movement of deposits from lower yielding
savings and NOW accounts to higher paying certificates of deposit within its
account base. The average rate paid on time deposits increased 103 basis
points, to 4.40% from 3.37% for the three months ended June 30, 2007 and 2006,
respectively. The average balances for money market and savings accounts
decreased $10.5 million, or 10.1%, to $93.5 million for the three months ended
June 30, 2007, from $104.0 million for the three months ended June 30, 2006 as
the spread widened for interest rates on time deposits, which appeared to
motivate customers to move funds into those higher paying instruments and lock
in the higher rates. A $1.2 million or 2.3% increase in NOW accounts brought
the average balance up to $52.8 million from $51.7 million between the two
years.
Interest expense on borrowed funds dropped from $206 thousand for the quarter
ended June 30, 2006 to $179 thousand for the quarter ended June 30, 2007, as
the average funds borrowed from the Federal Home Loan Bank (FHLB) of Boston
dropped from $17.6 million to $14.5 million between years. The softening of
loan demand, the $5.8 million growth in deposits on average between the first
half of 2006 and the first half of 2007, and the continuing yield curve
flatness led the Company to reduce its reliance on borrowed funds.
Provision for Loan Losses. There was no loan loss provision for the quarter
ended June 30, 2007 and $45 thousand for the quarter ended June 30, 2006. No
provision was deemed necessary for the second quarter of 2007 as the ratio of
allowance for loan losses to nonperforming loans rose from 55.93% at March 31,
2007 to 94.81% at June 30, 2007 and other indicators evaluated remained strong.
For further details see, FINANCIAL CONDITION -"Allowance for Loan Losses"
below.
17
Noninterest income. The following table sets forth changes from the second
quarter of 2006 to the second quarter of 2007 for components of noninterest
income:
For The Three Months Ended June 30,
--------------------------------------------
2007 2006 $ Variance % Variance
---- ---- ---------- ----------
(Dollars in thousands)
Trust income $ 83 $ 74 $9 12.2
Service fees 854 787 67 8.5
Net gains on sales of investment securities 47 14 33 235.7
Net gains on sales of loans held for sale 23 27 (4) (14.8)
Other 120 101 19 18.8
------ ------ ----
Total noninterest income $1,127 $1,003 $124 12.4
====== ====== ====
Trust income. The increase resulted primarily from increases in regular fee
income, which is based on the market value of assets managed and the addition
of new customers.
Service fees. The increase resulted primarily from increases in overdraft fees
of $15 thousand, or 5.0%; merchant program income increase of $16 thousand, or
22.0%; foreign exchange fee increase of $8 thousand, or 64.8%; and ATM/Debit
Card usage fees of $19 thousand, or 12.1%. These increases were partially
offset by a decline in deposit service charges of $7 thousand, or 13.2%.
Net gains on sales of investment securities. The Company took advantage of the
strong stock market during the second quarter of 2007 and sold partial
positions of three equity investments.
Net gains on sales of loans held for sale. Residential real estate loans of
$5.8 million were sold for a net gain of $23 thousand during the second quarter
of 2007, versus sales of $4.1 million for a net gain of $27 thousand during the
second quarter of 2006.
Other. The increase between periods is primarily due to the increase in net
mortgage servicing rights of $7 thousand from 2006 to 2007 and an $8 thousand
net gain on the sale of other real estate owned.
Noninterest expense. The following table sets forth changes from the second
quarter of 2006 to the second quarter of 2007 for components of noninterest
expense:
For The Three Months Ended June 30,
--------------------------------------------
2007 2006 $ Variance % Variance
---- ---- ---------- ----------
(Dollars in thousands)
Salaries and wages $1,549 $1,511 $ 38 2.5
Pension and employee benefits 520 552 (32) 5.8
Occupancy expense, net 214 198 16 8.1
Equipment expense 281 261 20 7.7
Equity in losses of affordable
housing investments 66 56 10 17.6
Other 923 873 50 5.7
------ ------ ----
Total noninterest expense $3,553 $3,451 $102 3.0
====== ====== ====
Salaries and wages and related expenses. The increase in 2007 over 2006 was due
primarily to regular salary activity offset partially by increased efficiency
in operations which allowed the Company to grow while reducing a few staff
positions. A decrease in the accrual for pension plan expense of $57 thousand
or 33.6% was partially offset by a $22 thousand or 11.1% increase in the
Company's medical and dental insurance costs.
Occupancy Expense. The increase for 2007 over 2006 was due primarily to the
increased square footage of the organization with the addition of the
Littleton, New Hampshire branch opened in March of 2006 and the purchase of an
additional office building in Morrisville, Vermont in December 2006. The
increased costs of fuel throughout the offices also contributed to the
increase.
18
Equipment Expense. The increase between years is primarily due to the purchase
of a Microsoft open license by the Company which will allow the Company to
increase the number of personal computers on its network and to migrate to
future software upgrades.
Equity in losses of affordable housing investments. The expense for 2006
included a credit adjustment for $11 thousand related to a 2005 investment once
the 2005 audited financial statements were received.
Other. The net change between years has many components; the largest being an
increase for the costs to bring or maintain properties in Other Real Estate
Owned which accounts for 92% of the increase. The expiration of state tax
credits and the growth in deposits led to an increase in Vermont franchise
taxes. The lack of the 2006 one time robbery loss and some operational
efficiencies kept the overall increase to 5.7%.
Income Tax Expense. The Company has provided for current and deferred federal
income taxes for the current and all prior periods presented. The Company's
provision for income taxes was $505 thousand for the three months ended June
30, 2007 and $548 thousand for 2006, as a result of the decrease in taxable net
income compared to the 2006 comparison period and the increase in tax exempt
income from municipal loans. The Company's effective tax rate decreased to
25.4% for the three months ended June 30, 2007, from 26.3% for the same period
in 2006, reflecting the increase in nontaxable municipal loan income.
Six Months Ended June 30, 2007, compared to Six Months Ended June 30, 2006.
Interest and Dividend Income. The Company's interest and dividend income
increased $693 thousand, or 5.7%, to $12.9 million for the six months ended
June 30, 2007, from $12.2 million for the six months ended June 30, 2006, with
average earning assets increasing $3.1 million, or 0.9%, to $351.4 million for
the six months ended June 30, 2007, from $348.2 million for the six months
ended June 30, 2006. The increase in interest income resulting from the rise in
average earning assets was augmented by the higher rates earned on all
categories of earning assets in 2007 versus 2006. Average loans approximated
$308.6 million at an average yield of 7.84% for the six months ended June 30,
2007, up from $308.4 million at an average yield of 7.47% for the six months
ended June 30, 2006. The slowing of loan demand especially for residential
construction and mortgage loans, is now being felt in the Northeast sector of
the United States. This is the main reason for the low growth in volume but
there was a 37 basis point increase in yield.
The average balance of investments (including mortgage-backed securities)
decreased $3.1 million or 10.6%, to $25.9 million for the six months ended June
30, 2007, from $28.9 million for the six months ended June 30, 2006, as
investment maturities were utilized to pay down some FHLB of Boston liquidity
advances in late 2006, or were reinvested in new securities or certificates of
deposit in other financial institutions. The average level of federal funds
sold and overnight deposits increased $5.0 million to $6.9 million for the six
months ended June 30, 2007, from $1.9 million for the six months ended June 30,
2006 as the yield curve was inverted for the majority of the first half of
2007, making short term funds an attractive investment vehicle. The average
level of interest bearing deposits in banks for the first half of 2007 was $8.6
million, up $1.0 million, or 12.8% from the 2006 average level of $7.6 million.
Interest income from non-loan instruments was $1.0 million year to date for
2007 and $866 thousand for the same period of 2006, reflecting the overall
increases in yields and volume.
Interest Expense. The Company's interest expense increased $977 thousand, or
32.0%, to $4.0 million for the six months ended June 30, 2007, from $3.1
million for the six months ended June 30, 2006, of which $156 thousand was a
result of the increase in volume and $821 thousand was due to increases in
rates, fueled by competition for funds from both local and out-of-market
competitors. This competition has been most evident for the money market and
certificate of deposit accounts, but higher paying interest-bearing checking
accounts are starting to appear in our market as well which puts more pressure
on the historical demand deposit and NOW account balances. Average
interest-bearing liabilities increased $3.2 million, or 1.2%, to $282.0 million
for the six months ended June 30, 2007, from $278.8 million for the six months
ended June 30, 2006, and the average rate paid increased 67 basis points to
19
2.88%, from 2.21% for the six months ended June 30, 2007 and 2006,
respectively. Average time deposits were $121.2 million for the six months
ended June 30, 2007, and $103.2 million for the six months ended June 30, 2006,
or an increase of $18.1 million, or 17.5%. The average rate paid on time
deposits increased 117 basis points, to 4.39% from 3.22% for the six months
ended June 30, 2007 and 2006, respectively. The average balances for money
market and savings accounts decreased $11.5 million, or 10.9%, to $94.2 million
for the six months ended June 30, 2007, from $105.7 million for the six months
ended June 30, 2006. NOW accounts remained fairly flat with the average balance
of $51.6 million for 2007 compared to $52.0 million for 2006.
The average balance of funds borrowed decreased from $17.9 million for the six
months ended June 30, 2006, to $14.9 million for the six months ended June 30,
2007, while the average rate paid on those funds rose from 4.58% to 4.92%
between years. The reduction in borrowings were funded from the maturity of
investment securities, as the rates on the advances were higher than the
current reinvestment rate available.
Provision for Loan Losses. The loan loss provision year to date as of June 30,
2007 was $45 thousand compared to $150 thousand for the same period in 2006. A
change in the composition of the loans within the portfolio and the continuing
improvement in both the ratio of allowance for loan losses to loans not held
for sale and nonperforming loans to total loans account for the decrease. For
further details see, FINANCIAL CONDITION - "Allowance for Loan Losses" below.
Noninterest income. The following table sets forth changes from year to date
2006 to year to date 2007 for components of noninterest income:
For The Six Months Ended June 30,
--------------------------------------------
2007 2006 $ Variance % Variance
---- ---- ---------- ----------
(Dollars in thousands)
Trust income $ 167 $ 145 $ 22 15.2
Service fees 1,650 1,493 157 10.5
Net gains on sales of investment securities 37 17 20 117.6
Net gains on sales of loans held for sale 50 119 (69) (58.0)
Other 166 175 (9) (5.1)
------ ------ ----
Total noninterest income $2,070 $1,949 $121 6.2
====== ====== ====
Trust income. The increase resulted from increases in regular fee income, which
is based on the market value of assets managed and the addition of new
customers.
Service fees. The increase resulted primarily from increases in overdraft fees
of $69 thousand, or 12.6%; increase in loan servicing fee income of $15
thousand, or 8.3%; increase in merchant services income of $29 thousand, or
16.2%; foreign exchange fee increase of $17 thousand, or 140%; and ATM/Debit
Card usage fees of $33 thousand, or 10.4%. These increases were partially
offset by a decline in deposit service charges of $15 thousand, or 13.8%, which
resulted from the introduction, during the first and second quarters of 2006,
of a group of retail deposit products that generally are not charged monthly
service fees.
Net gains on sales of loans held for sale. Residential real estate loans of
$9.2 million were sold for a net gain of $50 thousand during the first half of
2007, compared to sales of $10.8 million with a net gain of $119 thousand
during the first half of 2006. As the yield curve moved from inverted to flat
to slightly positive during the first half of 2007, premiums paid on loans sold
declined.
Other. The decrease mainly resulted from a $26 thousand decrease in mortgage
servicing rights between years and a $6 thousand reduction in net gains on
disposals of premises and equipment, partially offset by a $30 thousand net
gain on sales of other real estate owned.
20
Noninterest expense. The following table sets forth changes from year to date
2006 to year to date 2007 for components of noninterest expense:
For The Six Months Ended June 30,
--------------------------------------------
2007 2006 $ Variance % Variance
---- ---- ---------- ----------
(Dollars in thousands)
Salaries and wages $3,127 $3,005 $122 4.1
Pension and employee benefits 1,180 1,129 51 4.5
Occupancy expense, net 434 401 33 8.2
Equipment expense 543 517 26 5.0
Equity in losses of affordable
housing investments 133 165 (32) (19.4)
Other 1,804 1,631 173 10.6
------ ------ ----
Total noninterest expense $7,221 $6,848 $373 5.4
====== ====== ====
Salaries and wages and related expenses. The increase in 2007 over 2006 was due
primarily to regular salary activity. Increases in the Company's medical and
dental insurance costs of $91 thousand during the first half of 2007 was the
main factor in the increase in pension and employee benefits. This increase was
partially offset by a drop in pension expense due to rising long term interest
rates and the performance of the market.
Occupancy Expense. The increase for 2007 over 2006 was due primarily to the
increased square footage of the organization with the addition of the
Littleton, New Hampshire branch opened in March of 2006 and the purchase of an
additional office building in Morrisville, Vermont in December 2006. The
increased costs of fuel throughout the offices also contributed to the
increase.
Equipment Expense. The increase between years is primarily due to the purchase
of a Microsoft open license by the Company which will allow us to increase the
number of personal computers on our network and to migrate to future software
upgrades.
Amortization of investments in affordable housing projects. The expense for
2006 was higher than the current year as it included a $32 thousand adjustment
related to new partnerships investments for 2005 that was not known until the
partnership's 2005 financial statements were received in April of 2006.
Other. The increase between years is primarily due to the costs to bring or
maintain properties in other real estate owned which is $86 thousand higher in
2007 or $106 thousand in total. These costs are added to by increases in
ATM/debit card expenses, contributions, legal fees, Vermont franchise taxes due
to the expiration of state tax credits and growth in deposits and trust
department expenses. These increases are somewhat offset by the reduction in
convention, training, and checkbook expenses as well as the lack of the one
time robbery loss in June of 2006.
Income Tax Expense. The Company has provided for current and deferred federal
income taxes for the current and all prior periods presented. The Company's
provision for income taxes decreased $145 thousand, or 13.7%, to $913 thousand
for the six months ended June 30, 2007, from $1.06 million for the same period
in 2006, with the decrease in net income compared to the 2006 period and the
increase in nontaxable municipal income. The Company's effective tax rate
decreased to 25.1% for the six months ended June 30, 2007, from 26.0% for the
same period in 2006.
FINANCIAL CONDITION
At June 30, 2007 the Company had total consolidated assets of $375.7 million,
including gross loans and loans held for sale ("total loans") of $306.5
million, deposits of $308.9 million and stockholders' equity of $41.7 million.
The Company's total assets experienced a seasonal decrease of $5.4 million or
1.4% to $375.7 million at June 30, 2007, from $381.1 million at December 31,
2006. The decrease is primarily due to the payoff of $7.6 million in tax
anticipation municipal loans on the last business day of June to comply with
Vermont law governing municipal finance. As anticipated, municipal loans
increased $6.7 million on July 2nd, the first business day of the next quarter,
reflecting the seasonal fluctuations in these loans.
21
Net loans and loans held for sale were $303.1 million, or 80.7% of total assets
at June 30, 2007, as compared to $314.1 million, or 82.4% of total assets at
December 31, 2006.
Cash and cash equivalents, including federal funds sold and overnight deposits,
decreased $3.7 million, or 17.6%, to $17.3 million at June 30, 2007, from $21.0
million at December 31, 2006. Interest bearing deposits in banks increased $5.0
million or 92.7% from $5.4 million at December 31, 2006 to $10.4 million at
June 30, 2007 as these FDIC insured deposits were one of the most attractive
investment alternatives during the first half of 2007.
Investment securities available-for-sale increased from $23.7 million at
December 31, 2006, to $26.7 million at June 30, 2007, a $3.0 million, or 12.7%,
increase. As loan demand was not as strong during the first quarter of 2007,
the opportunity was taken to rebuild the investment portfolio to a more normal
level. The securities available-for-sale and interest bearing deposits in banks
increased from 7.6% of total assets at December 31, 2006 to 9.9% at June 30,
2007.
Deposits decreased $11.0 million, or 3.4%, to $308.9 million at June 30, 2007,
from $319.8 million at December 31, 2006, reflecting a pattern of the seasonal
variation in dollars on deposit which is exacerbated by the redemption of
certificates of deposit and other deposit accounts on the last day of the
second quarter by municipal customers in order to comply with state law to
payoff their tax anticipation notes annually. Noninterest bearing deposits
decreased $7.9 million, or 14.4%, from $54.9 million at December 31, 2006, to
$46.9 million at June 30, 2007, while interest bearing deposits decreased $3.0
million, or 1.1%, from $264.9 million at December 31, 2006, to $261.9 million
at June 30, 2007. (See average balances and rates in the Yields Earned and
Rates Paid tables on Page 14 and 15.) With the rise in interest rates being
paid on deposits of all types over the past two years and aggressive rate
competition from in-market and out-of-market financial institutions,
noninterest bearing deposit accounts are harder to attract and retain.
Total borrowings increased $4.3 million or 29.6% to $18.9 million at June 30,
2007, from $14.6 million at December 31, 2006 as a short term liquidity advance
was taken from the FHLB of Boston late in June 2007 and paid back on the first
business day of July to hedge against a liquidity crunch on the last business
day of June due to the seasonal municipal activity.
Total stockholders' equity decreased $227 thousand from December 31, 2006 to
$41.7 million at June 30, 2007, reflecting net income of $2.7 million for the
first half of 2007, less the regular cash dividends paid of $2.5 million, the
purchase of Treasury stock totaling $243 thousand, and an increase of $172
thousand in accumulated other comprehensive loss. (See Capital Resources
section on Page 34)
Loans Held for Sale and Loan Portfolios. The Company's total loans primarily
consist of adjustable-rate and fixed-rate mortgage loans secured by one-to-four
family, multi-family residential or commercial real estate. As of June 30,
2007, the Company's total loan portfolio was $306.5 million, or 81.6% of
assets, down from $317.6 million, or 83.3% of assets as of December 31, 2006,
and from $307.6 million or 84.8% of assets as of June 30, 2006. Total loans
(including loans held for sale) have decreased $11.0 million since December 31,
2006, while average loans (including loans held for sale) were $308.4 million
for the 2006 comparison period and have grown to $308.6 million for the first
half of 2007. The Company sold $9.2 million of loans held for sale during the
first half of 2007 resulting in a gain on sale of loans of $50 thousand,
compared with loan sales of $10.9 million and related gain on sale of loans of
$119 thousand for the first half of 2006. The Company recognizes that
competition for good loans is strong and has placed continued emphasis on
calling on both current and prospective customers.
22
The following table shows information on the composition of the Company's total
loan portfolio as of June 30, 2007 and December 31, 2006:
Loan Type June 30, 2007 December 31, 2006
--------- ------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Residential real estate $110,014 35.9 $114,139 35.9
Construction real estate 20,446 6.7 22,568 7.1
Commercial real estate 134,501 43.9 130,848 41.2
Commercial 20,159 6.6 19,253 6.1
Consumer 7,402 2.4 7,717 2.4
Municipal loans 10,860 3.5 19,297 6.1
Loans Held for Sale 3,166 1.0 3,750 1.2
-------- ----- -------- -----
Total loans 306,548 100.0 317,572 100.0
Deduct:
Allowance for loan losses 3,326 3,338
Unearned net loan fees 108 120
-------- --------
Net loans and loans held for sale $303,114 $314,114
======== ========
The Company originates and sells some residential mortgages into the secondary
market, with most such sales made to the Federal Home Loan Mortgage Corporation
(FHLMC/"Freddie Mac") and the Vermont Housing Finance Agency (VHFA). The
Company services a $199.5 million residential real estate mortgage portfolio,
approximately $89.5 million of which was serviced for unaffiliated third
parties at June 30, 2007. Additionally, the Company originates commercial real
estate and commercial loans under various SBA programs that provide an agency
guarantee for a portion of the loan amount. The Company occasionally sells the
guaranteed portion of the loan to other financial concerns and will retain
servicing rights, which generates fee income. The Company serviced $6.2 million
of commercial and commercial real estate loans for unaffiliated third parties
as of June 30, 2007. The Company capitalizes servicing rights on these fees and
recognizes gains and losses on the sale of the principal portion of these loans
as they occur. The unamortized balance of servicing rights on loans sold with
servicing retained was $315 thousand at June 30, 2007, with an estimated market
value in excess of their carrying value.
In the ordinary course of business, the Company occasionally participates out,
on a non-recourse basis, a portion of commercial or real estate loans to other
financial institutions for liquidity or credit concentration management
purposes. The total of loans participated out as of June 30, 2007 was $12.7
million.
Asset Quality. The Company, like all financial institutions, is exposed to
certain credit risks including those related to the value of the collateral
that secures its loans and the ability of borrowers to repay their loans.
Management closely monitors the Company's loan and investment portfolios and
other real estate owned for potential problems and reports to the Company's and
the subsidiary's Boards of Directors at regularly scheduled meetings.
The Company's loan review procedures include a credit quality assurance process
that begins with approval of lending policies and underwriting guidelines by
the Board of Directors and includes a loan review department supervised by an
experienced, former regulatory examiner, conservative individual lending limits
for officers, Board approval for large credit relationships and a quality
control process for loan documentation that includes post-closing reviews. The
Company also maintains a monitoring process for credit extensions. The Company
performs periodic concentration analyses based on various factors such as
industries, collateral types, large credit sizes, and officer portfolio loads.
The Company has established underwriting guidelines to be followed by its
officers, and exceptions are required to be approved by a senior loan officer
or the Board of Directors. The Company monitors its delinquency levels for any
negative or adverse trends. There can be no assurance, however, that the
Company's loan portfolio will not become subject to increasing pressures from
deteriorating borrower credit due to general or local economic conditions.
23
Restructured loans include the Company's troubled debt restructurings that
involved forgiving a portion of interest or principal on any loans, refinancing
loans at a rate materially less than the market rate, rescheduling loan
payments, or granting other concessions to a borrower due to financial or
economic reasons related to the debtor's financial difficulties. Restructured
loans do not include qualifying restructured loans that have complied with the
terms of their restructure agreement for a satisfactory period of time.
Restructured loans in compliance with modified terms totaled $1.9 million at
June 30, 2007 and $1.3 million at December 31, 2006. Of the $1.9 million in
restructured loans at June 30, 2007, all except $248 thousand is guaranteed by
the U.S. Department of Agriculture-Rural Development or by the Vermont Economic
Development Authority. At, June 30, 2007 the Company was not committed to lend
any additional funds to borrowers whose terms have been restructured.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Loans are designated as nonaccrual when reasonable doubt
exists as to the full collection of interest and principal. Normally, when a
loan is placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of interest and principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
The Company had loans in nonaccrual status totaling $3.0 million, or 0.97% of
gross loans at June 30, 2007, $2.5 million, or 0.80%, at December 31, 2006, and
$1.2 million, or 0.38%, at June 30, 2006. The increase over the last six months
is primarily due to one residential construction loan with a loan to value
ratio less than 75% being placed in nonaccrual status. Certain loans in
non-accrual status are covered by guarantees of U.S. Government or state
agencies. Approximately $507 thousand of the balances in this category were
covered by such guarantees at June 30, 2007. The aggregate interest income not
recognized on such nonaccrual loans amounted to approximately $464 thousand and
$274 thousand as of June 30, 2007 and 2006, respectively and $371 thousand as
of December 31, 2006.
The Company had $554 thousand in loans past due 90 days or more and still
accruing at June 30, 2007 and $2.2 million at December 31, 2006. The decrease
between periods was mainly due to three real estate loans that have
subsequently been moved to nonaccrual totaling $764 thousand, two real estate
loans totaling $292 thousand that have paid off, loans totaling $936 thousand
that have subsequently been brought current or are less than 90 days past due,
partially offset by $392 thousand of loans that have become 90 days or more
past due as of June 30, 2007. Certain loans past due 90 days or more and still
accruing interest are covered by guarantees of U.S. Government or state
agencies. Approximately $160 thousand of the balances in this category were
covered by such guarantees at June 30, 2007.
At June 30, 2007, and December 31, 2006, respectively, the Company had
internally classified certain loans totaling $74 thousand and $319 thousand,
respectively. In management's view, such loans represent a higher degree of
risk and could become nonperforming loans in the future. While still on a
performing status, in accordance with the Company's credit policy, loans are
internally classified when a review indicates one or more of the following
conditions makes the likelihood of collection uncertain:
o the financial condition of the borrower is unsatisfactory;
o repayment terms have not been met;
o the borrower has sustained losses that are sizable, either in
absolute terms or relative to net worth;
o confidence is diminished;
o loan covenants have been violated;
o collateral is inadequate; or
o other unfavorable factors are present.
24
On occasion real estate properties are acquired through or in lieu of loan
foreclosure. These properties are to be sold and are initially recorded at the
lesser of the recorded loan or fair value via an appraisal for more significant
properties and an evaluation for minor properties at the date of acquisition
establishing a new carrying basis. The Company had $3 thousand of land, $184
thousand in residential real estate, and $251 thousand of commercial real
estate property classified as OREO at June 30, 2007 compared to $3 thousand of
land, $98 thousand of residential real estate and $298 thousand of commercial
real estate property at December 31, 2006. The other real estate owned was
included in Other Assets on the Consolidated Balance Sheet at both time
periods.
Allowance for Loan Losses. Some of the Company's loan customers ultimately do
not make all of their contractually scheduled payments, requiring the Company
to charge off a portion or all of the remaining principal balance due. The
Company maintains an allowance for loan losses to absorb such losses. The
allowance is maintained at a level which, in management's judgment, is adequate
to absorb credit losses inherent in the loan portfolio; however, actual loan
losses may vary from current estimates.
Adequacy of the allowance for loan losses is determined using a consistent,
systematic methodology, which analyzes the risk inherent in the loan portfolio.
In addition to evaluating the collectibility of specific loans when determining
the adequacy of the allowance, management also takes into consideration other
factors such as changes in the mix and size of the loan portfolio, historic
loss experience, the amount of delinquencies and loans adversely classified,
industry trends, and the impact of the local and regional economy on the
Company's borrowers. The adequacy of the allowance for loan losses is assessed
by an allocation process whereby specific loss allocations are made against
certain adversely classified loans and general loss allocations are made
against segments of the loan portfolio which have similar attributes. While for
internal analytical purposes the Company allocates the allowance for loan
losses based on a percentage by category, the portion of the allowance for loan
losses allocated to each category does not represent the total available for
future losses which may occur within the loan category since the total
allowance for possible loan losses is a valuation reserve available to cover
losses in the entire portfolio.
The allowance for loan losses is increased by a provision for loan losses,
which is charged to earnings, and reduced by charge-offs, net of recoveries.
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for loan losses. Based on
an evaluation of the loan portfolio, management presents a quarterly analysis
of the allowance for loan losses to the Board of Directors, indicating any
changes since the last review and any recommendations as to adjustments.
Additionally, various regulatory agencies periodically review the Company's
allowance for loan losses as an integral part of their examination process.
For the quarter ended June 30, 2007, the methodology used to determine the
provision for loan losses was unchanged from the prior quarter or year. The
Company's loan portfolio balance decreased $10.4 million, or 3.3% from December
31, 2006. There was a reduction in the balance of all loan types except
commercial and commercial real estate between December 31, 2006 and June 30,
2007. There was an improvement in the ratio of allowance for loan losses to
nonperforming loans from 70.26% at December 31, 2006 to 94.81% at June 30,
2007. The overall reduction in the loan portfolio decreased the estimated
allowance for loan losses, while a rise in nonperforming loans increased the
estimated allowance for loan losses. As a result of the combined changes the
Company designated no loan loss provision for the quarter ended June 30, 2007
which, together with net charge-offs after recoveries left the allowance for
loan losses at $3.3 million at June 30, 2007. There was no material change in
the lending programs or terms during the quarter.
25
The following table reflects activity in the allowance for loan losses for the
three and six months ended June 30, 2007 and 2006:
Three Months Ended, June 30, Six Months Ended, June 30,
---------------------------- --------------------------
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $3,342 $3,147 $3,338 $3,071
Charge-offs
Real Estate - - 30 -
Commercial - - - -
Consumer and other 26 26 54 35
------ ------ ------ ------
Total charge-offs 26 26 84 35
------ ------ ------ ------
Recoveries
Real Estate 1 3 8 25
Commercial 1 - 2 12
Consumer and other 8 6 17 12
------ ------ ------ ------
Total recoveries 10 9 27 49
------ ------ ------ ------
Net (charge-offs) recoveries (16) (17) (57) 14
------ ------ ------ ------
Provision for loan losses - 105 45 150
------ ------ ------ ------
Balance at end of period $3,326 $3,235 $3,326 $3,235
====== ====== ====== ======
The following table shows the internal breakdown of the Company's allowance for
loan losses by category of loan (net of loans held for sale) and the percentage
of loans in each category to total loans in the respective portfolios at the
dates indicated:
June 30, 2007 December 31, 2006
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Real Estate
Residential $ 666 34.8 $ 640 34.8
Commercial 1,967 44.3 1,901 41.7
Construction 240 6.7 296 7.2
Other Loans
Commercial 316 6.7 312 6.1
Consumer installment 115 2.4 125 2.5
Municipal, Other and
Unallocated 22 5.1 64 7.7
------ ----- ------ -----
Total $3,326 100.0 $3,338 100.0
====== ===== ====== =====
Ratio of Net Charge Offs
(Recoveries) to Average Loans
not held for sale (1) 0.04 (0.03)
===== =====
Ratio of Allowance for Loan
Losses to Loans not held
for sale 1.10 1.06
===== =====
Ratio of Allowance for Loan
Losses to nonperforming
loans (2) 94.81 70.26
===== =====
--------------------
(1) Annualized
(2) Non-performing loans include loans in non-accrual status and loans past
due 90 days or more and still accruing.
26
Not withstanding the categories shown in the table above, all funds in the
allowance for loan losses are available to absorb loan losses in the portfolio,
regardless of loan category.
Management of the Company believes that the allowance for loan losses at June
30, 2007, was appropriate to cover losses inherent in the Company's loan
portfolio as of such date. There can be no assurance that the Company will not
sustain losses in future periods, which could be greater than the size of the
allowance for loan losses at June 30, 2007. See CRITICAL ACCOUNTING POLICIES.
While the Company recognizes that an economic slowdown may adversely impact its
borrowers' financial performance and ultimately their ability to repay their
loans, management continues to be cautiously optimistic about the key credit
indicators from the Company's loan portfolio.
Investment Activities. At June 30, 2007, the reported value of investment
securities available-for-sale was $26.7 million or 7.1% of assets. The amount
in investment securities available-for-sale increased from $23.7 million, or
6.2% of assets at December 31, 2006, as the Company rebuilt the investment
portfolio in light of decreased loan demand.
The Company had no securities classified as held-to-maturity or trading. The
reported value of investment securities available-for-sale at June 30, 2007
reflects a negative valuation adjustment of $494 thousand. The offset of this
adjustment, net of income tax effect, was a $326 thousand loss reflected in the
Company's accumulated other comprehensive loss component of stockholders'
equity at June 30, 2007.
At June 30, 2007, thirty-seven securities with a fair value of $13.7 million or
51.4% of the portfolio have been in an unrealized loss position for more than
twelve months totaling $442 thousand. These unrealized losses are attributed to
the interest rate environment as there are no credit quality issues. The
Company has the ability to hold all of these securities, classified as
available-for-sale, for the foreseeable future. Management deems the unrealized
losses on the Company's securities not to be other than temporary.
At December 31, 2006, the Company had thirty-eight debt securities with a fair
value of $15.0 million with an unrealized loss of $400 thousand, or 63.3% of
the value of the amortized cost of the entire investment portfolio, that had
existed for more than 12 months.
Deposits. The following table shows information concerning the Company's
average deposits by account type and weighted average nominal rates at which
interest was paid on such deposits for the periods ended June 30, 2007, and
December 31, 2006:
Six Months Ended June 30, Year Ended December 31,
2007 2006
--------------------------------- ---------------------------------
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Non-time deposits:
Demand deposits $47,480 15.1 - $ 49,328 15.9 -
NOW accounts 51,608 16.4 0.79% 52,937 17.1 0.74%
Money Market accounts 51,569 16.4 2.71% 56,286 18.1 2.48%
Savings accounts 42,647 13.6 0.63% 46,061 14.8 0.60%
-------- ----- -------- -----
Total non-time deposits 193,304 61.5 1.07% 204,612 65.9 1.01%
-------- ----- -------- -----
Time deposits:
Less than $100,000 76,157 24.2 4.07% 66,982 21.6 3.34%
$100,000 and over 45,087 14.3 4.93% 38,706 12.5 4.14%
-------- ----- -------- -----
Total time deposits 121,244 38.5 4.39% 105,688 34.1 3.64%
-------- ----- -------- -----
Total deposits $314,548 100.0 2.35% $310,300 100.0 1.90%
======== ===== ======== =====
27
The Company's customers have been opening certificates of deposit to take
advantage of increasing time deposit rates as evidenced by the $6.4 million, or
16.5% increase in average time deposits of $100,000 and over and the $9.2
million, or 13.7% increase in time deposits less than $100,000 in 2007 year to
date versus 2006.
As a participant in the Certificate of Deposit Account Registry Service (CDARS)
of Promontory Interfinancial Network, LLC, there were $4.3 million of time
deposits less than $100,000 on the balance sheet at June 30, 2007 which are
considered to be "brokered" deposits. The deposits are matched dollar for
dollar with Union's customer deposits which have been placed in other financial
institutions in order to provide those customers with full FDIC insurance
coverage.
The following table sets forth information regarding the Company's time
deposits in amounts of $100,000 and over at June 30, 2007, and December 31,
2006, that mature during the periods indicated:
June 30, 2007 December 31, 2006
------------- -----------------
(Dollars in thousands)
Within 3 months $13,495 $13,466
3 to 6 months 9,610 17,254
6 to 12 months 7,418 11,299
Over 12 months 2,797 2,219
------- -------
$33,320 $44,238
======= =======
The drop in time deposits in amounts of $100,000 and over between December 31,
2006 and June 30, 2007 is normal given the seasonality of municipal deposits
with the maturity of their deposits utilized to payoff their tax anticipation
notes as of June 30th as previously discussed.
Borrowings. Borrowings from the FHLB were $18.9 million at June 30, 2007, at a
weighted average rate of 5.08%, and $14.6 million at December 31, 2006, at a
weighted average rate of 4.82%. The change between year end 2006 and the end of
the second quarter 2007 is a net increase of $4.3 million, or 29.5%, mainly due
to the $5 million one week advance that matured on July 2, 2007 that was taken
to hedge against a liquidity crunch caused by municipal customer activity at
quarter end generated to comply with state law.
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Asset and Liability Management. Market risk is the potential of
loss in a financial instrument arising from adverse changes in market prices,
interest rates, foreign currency exchange rates, commodity prices, and equity
prices. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, deposit taking and borrowing activities as
yields on assets change in a different time period or in a different amount
from that of interest costs on liabilities. Many other factors also affect the
Company's exposure to changes in interest rates, such as general and local
economic and financial conditions, competitive pressures, customer preferences,
and historical pricing relationships.
The earnings of the Company and its subsidiary are affected not only by general
economic conditions, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve System. The monetary
policies of the Federal Reserve System influence to a significant extent the
overall growth of loans, investments, deposits and borrowings; the level of
interest rates earned on assets and paid for liabilities including interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in monetary policies are often not predictable.
A key element in the process of managing market risk involves direct
involvement by senior management and oversight by the Board of Directors as to
the level of risk assumed by the Company in its balance sheet. The Board of
Directors reviews and approves risk management policies, including risk limits
and guidelines and reviews quarterly the current position in relationship to
those limits and guidelines. Daily oversight functions are delegated to the
Asset Liability Management Committee ("ALCO"). The ALCO, consisting of senior
business and finance officers, actively measures, monitors, controls and
manages the interest rate risk exposure that can significantly impact the
Company's financial position and operating
28
results. The ALCO sets liquidity targets based on the Company's financial
position and existing and projected economic and market conditions. The Company
does not have any market risk sensitive instruments acquired for trading
purposes. The Company attempts to structure its balance sheet to maximize net
interest income and shareholder value while controlling its exposure to
interest rate risk and strategies might include selling or participating out
loans held for sale or investments available-for-sale. The ALCO formulates
strategies to manage interest rate risk by evaluating the impact on earnings
and capital of such factors as current interest rate forecasts and economic
indicators, potential changes in such forecasts and indicators, liquidity, and
various business strategies. The ALCO's methods for evaluating interest rate
risk include an analysis of the Company's interest rate sensitivity "gap",
which provides a static analysis of the maturity and repricing characteristics
of the Company's entire balance sheet, and a simulation analysis, which
calculates projected net interest income based on alternative balance sheet and
interest rate scenarios, including "rate shock" scenarios involving immediate
substantial increases or decreases in market rates of interest.
Members of ALCO meet informally at least weekly to set loan and deposit rates,
make investment decisions, monitor liquidity and evaluate the loan demand
pipeline. Deposit runoff is monitored daily and loan prepayments evaluated
monthly. The Company historically has maintained a substantial portion of its
loan portfolio on a variable-rate basis and plans to continue this
Asset/Liability Management (ALM) strategy in the future. Portions of the
variable-rate loan portfolio have interest rate floors and caps which are taken
into account by the Company's ALM modeling software to predict interest rate
sensitivity, including prepayment risk. As of June 30, 2007, the investment
portfolio was all classified as available-for-sale and the modified duration
was relatively short. The Company does not utilize any derivative products or
invest in any "high risk" instruments.
The Company's interest rate sensitivity analysis (simulation) as of December
2006 for a flat rate environment (Prime at December 31, 2006 and June 30, 2007,
was 8.25%) projected the following for the six months ended June 30, 2007,
compared to the actual results:
June 30, 2007
-------------------------------------
Percentage
Projected Actual Difference
--------- ------ ----------
(Dollars in thousands)
Net Interest Income $8,737 $8,830 1.1%
Net Income $2,551 $2,721 6.7%
Return on Assets 1.40% 1.44% 2.9%
Return on Equity 12.52% 13.08% 4.5%
Actual net income is higher than projected mainly due to the higher actual net
interest income than projected, the lower actual loan loss provision, and the
gain on sales of securities and other real estate owned that had not been
projected.
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements. The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
interest rate caps and floors written on adjustable-rate loans, commitments to
participate in or sell loans, and commitments to buy or sell securities or
certificates of deposit. Such instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of these instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest rate caps and floors written on adjustable-rate
loans, the contract or notional amounts do not represent management's estimate
of the actual exposure to credit loss. The Company controls the risk of
interest rate cap agreements through credit approvals, limits, and monitoring
procedures.
29
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of June 30, 2007 and December 31,
2006, the contract or notional amount of financial instruments whose contract
or notional amount represents credit risk was as follows:
June 30, 2007 December 31, 2006
------------- -----------------
(Dollars in thousands)
Commitments to originate loans $18,790 $12,176
Unused lines of credit 36,418 36,574
Standby letters of credit 960 1,046
Credit Card arrangements 1,547 1,457
Equity investment commitment to housing
limited partnership - 917
Commitments to repurchase treasury stock 9 -
------- -------
Total $57,724 $52,170
======= =======
Commitments to originate loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the loan commitments are expected to
expire without being drawn upon and not all credit lines will be utilized, the
total commitment amounts do not necessarily represent future cash requirements.
The Company's significant fixed and determinable contractual obligations to
third parties at June 30, 2007, and December 31, 2006, were as follows:
June 30, 2007 December 31, 2006
------------- -----------------
(Dollars in thousands)
Operating lease commitments $ 267 $ 316
Maturities on borrowed funds 18,922 14,596
Deposits without stated maturity (1) 197,068 202,997
Certificates of deposit (1) 111,797 116,825
Pension plan contributions (2) 635 700
Deferred compensation payouts (3) 488 551
Equity in housing limited partnerships 902 356
Real estate and construction contracts (4) 691 28
-------- --------
Total $330,770 $336,369
======== ========
--------------------
(1) While Union has a contractual obligation to depositors should they wish
to withdraw all or some of the funds on deposit, management believes,
based on historical analysis, that the majority of these deposits will
remain on deposit for the foreseeable future. The amounts exclude
interest accrued.
(2) Funding requirements for pension benefits after 2007 are excluded due to
the significant variability in the assumptions required to project the
amount and timing of future cash contributions.
(3) The Company owns life insurance on the lives of the payees, in an amount
estimated by management to be sufficient to reimburse the Company for the
deferred compensation payments should the Company desire to utilize the
death benefit proceeds for that purpose. The policies have a current cash
surrender value of $2.0 million. The Company also owns mutual funds.
(4) Contracts to purchase a new branch site and to complete renovation on one
of the Morrisville administrative buildings.
The Company's subsidiary bank is required (as are all banks) to maintain vault
cash or a noninterest bearing reserve balance as established by Federal Reserve
regulations. The Bank's daily total reserve for the 14 day maintenance period
including June 30, 2007 was $401 thousand and for December 31, 2006 was $2.3
million, both of which were satisfied by vault cash. The Bank reclassifies
transaction deposit accounts that meet certain criteria to savings accounts, in
accordance with Federal Reserve banking regulations, for the purpose of
reporting deposits subject to reserves to the Federal Reserve Bank of Boston.
Fluctuations in the number and balances of transaction deposit accounts
reclassified for reporting deposits subject to reserves impact the total
reserve requirement for each 14 day maintenance period. The Company has also
committed to maintain a noninterest bearing contracted clearing balance of $1
million at June 30, 2007 with the Federal Reserve Bank of Boston.
30
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is
defined as the difference between interest earning assets and interest bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market interest rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by scheduling
interest earning assets and interest bearing liabilities into periods based
upon the next date on which such assets and liabilities could mature or
reprice. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except that:
o adjustable-rate loans, investment securities, variable-rate time
deposits, and FHLB advances are included in the period when they are
first scheduled to adjust and not in the period in which they mature;
o fixed-rate mortgage-related securities and loans reflect estimated
prepayments, which were estimated based on analyses of broker estimates,
the results of a prepayment model utilized by the Company, and empirical
data;
o other nonmortgage related fixed-rate loans reflect scheduled contractual
amortization, with no estimated prepayments; and
o NOW, money markets, and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on
detailed studies by the Company of the sensitivity of each such category
of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and
considers them reasonable. However, the interest rate sensitivity of the
Company's assets and liabilities in the tables could vary substantially if
different assumptions were used or actual experience differs from the
historical experience on which the assumptions are based.
31
The following table shows the Company's rate sensitivity analysis as of June
30, 2007:
Cumulative repriced within
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Years Total
-------- ------- ------ ------ ------ -----
(Dollars in thousands, by repricing date)
Interest sensitive assets:
Federal funds sold and
overnight deposits $ 5,064 $ - $ - $ - $ - $ 5,064
Interest bearing deposits in banks 788 3,457 4,833 1,271 90 10,439
Investment securities available-for-sale (1)(3) 609 6,084 8,872 4,862 5,963 26,390
FHLB Stock - - - - 1,385 1,385
Loans and loans held for sale (2)(3) 97,325 42,432 67,092 62,018 37,573 306,440
-------- ------- ------- -------- -------- --------
Total interest sensitive assets $103,786 $51,973 $80,797 $ 68,151 $ 45,011 $349,718
Interest sensitive liabilities:
Time deposits $ 45,426 $50,308 $15,365 $ 698 $ - $111,797
Money markets 6,585 - - - 42,986 49,571
Regular savings 4,252 - - - 37,954 42,206
NOW accounts 21,397 - - - 36,950 58,347
Borrowed funds 5,202 621 1,240 2,946 8,913 18,922
-------- ------- ------- -------- -------- --------
Total interest sensitive liabilities $ 82,862 $50,929 $16,605 $ 3,644 $126,803 $280,843
Net interest rate sensitivity gap $ 20,924 $ 1,044 $64,192 $ 64,507 $(81,792) $ 68,875
Cumulative net interest rate
sensitivity gap $ 20,924 $21,968 $86,160 $150,667 $ 68,875
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 5.6% 5.8% 22.9% 40.1% 18.3%
Cumulative net interest rate sensitivity
gap as a percentage of total
Interest sensitive assets 6.0% 6.3% 24.6% 43.1% 19.7%
Cumulative net interest rate sensitivity
gap as a percentage of total
Interest sensitive liabilities 7.5% 7.8% 30.7% 53.6% 24.5%
(1) Investment securities available-for-sale exclude marketable equity securities with a fair value of $275 thousand and
mutual funds with a value of $17 thousand that may be sold by the Company at any time.
(2) Balances shown net of unearned income of $108 thousand.
(3) Estimated repayment assumptions considered in Asset/Liability model.
Simulation Analysis. In its simulation analysis, the Company uses computer
software to simulate the estimated impact on net interest income and capital
(Net Fair Value) under various interest rate scenarios, balance sheet trends,
and strategies over a relatively short time horizon. These simulations
incorporate assumptions about balance sheet dynamics such as loan and deposit
growth, product pricing, prepayment speeds on mortgage related assets,
principal maturities on other financial instruments, and changes in funding
mix. While such assumptions are inherently uncertain as actual rate changes
rarely follow any given forecast and asset-liability pricing and other model
inputs usually do not remain constant in their historical relationships,
management believes that these assumptions are reasonable. Based on the results
of these simulations, the Company is able to quantify its estimate of interest
rate risk and develop and implement appropriate strategies.
32
The following chart reflects the cumulative results of the Company's latest
simulation analysis for the next twelve months on net interest income, net
income, return on assets, return on equity and net fair value ratio. Shocks are
intended to capture interest rate risk under extreme conditions by immediately
shifting to the new level. The projection utilizes a rate shock, applied
proportionately, of up and down 300 basis points from the June 30, 2007 prime
rate of 8.25%, this is the highest and lowest internal slopes monitored. This
slope range was determined to be the most relevant during this economic cycle.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
(Dollars in thousands)
Return on Return on Net Fair
12 Months Prime Net Interest Change Net Assets Equity Value
Ending Rate Income % Income % % Ratio
June-08 11.25% $19,705 11.75 $6,953 1.79 16.28 8.81%
8.25% $17,633 - $5,528 1.38 12.84 10.61%
5.25% $15,443 (12.42) $4,024 0.94 8.97 12.40%
The resulting projected cumulative effect of these estimates on net interest
income and the net fair value ratio for the twelve month period ending June 30,
2008, are within approved ALCO guidelines for interest rate risk for a flat and
up 300 basis point rate environment but in a down 300 basis point rate
environment both Return on Assets and Return on Equity are below policy
guidelines. The simulations of earnings do not incorporate any management
actions, which might moderate the negative consequences of interest rate
deviations. Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk under different rate scenarios.
Liquidity. Managing liquidity risk is essential to maintaining both depositor
confidence and stability in earnings. Liquidity is a measurement of the
Company's ability to meet potential cash requirements, including ongoing
commitments to fund deposit withdrawals, repay borrowings, fund investment and
lending activities, and for other general business purposes. The Company's
principal sources of funds are deposits, amortization and prepayment of loans
and securities, maturities of investment securities and other short-term
investments, sales of securities and loans available-for-sale, earnings and
funds provided from operations. Maintaining a relatively stable funding base,
which is achieved by diversifying funding sources, competitively pricing
deposit products, and extending the contractual maturity of liabilities,
reduces the Company's exposure to rollover risk on deposits and limits reliance
on volatile short-term purchased funds. Short-term funding needs arise from
declines in deposits or other funding sources, funding of loan commitments,
draws on unused lines of credit and requests for new loans. The Company's
strategy is to fund assets, to the maximum extent possible, with core deposits
that provide a sizable source of relatively stable and low-cost funds. For the
quarter ended, June 30, 2007, the Company's ratio of average loans to average
deposits was 97.5% compared to the prior year of 101.1%.
In addition, as Union Bank is a member of the FHLB of Boston, it has access to
an unused line of credit up to $1.6 million at June 30, 2007 over and above the
term advances already drawn on the line based on FHLB estimate as of that date
and with the purchase of required capital stock that amount would rise to $41.2
million. This line of credit could be used for either short or long term
liquidity or other needs. In addition to its borrowing arrangements with the
FHLB of Boston, Union Bank maintains a $7.5 million pre-approved Federal Funds
line of credit with an upstream correspondent bank and a repurchase agreement
line with a selected brokerage house. There were no balances outstanding on
either line at June 30, 2007. Union is a member of the Certificate of Deposit
Account Registry Service ("CDARS") of Promontory Interfinancial Network which
allows Union to provide higher FDIC deposit insurance to customers by
exchanging deposits with other members and allows Union to purchase deposits
from other members as another source of funding. There were no purchased
deposits at either June 30, 2007 or December 31, 2006 although Union had
exchanged $4.3 million and $2.5 million, respectively, with other CDARS members
as of those dates.
33
While scheduled loan and securities payments and FHLB advances are relatively
predictable sources of funds, deposit flows and prepayments on loans and
mortgage-backed securities are greatly influenced by general interest rates,
economic conditions, and competition. The Company's liquidity is actively
managed on a daily basis, monitored by the ALCO, and reviewed periodically with
the subsidiary's Board of Directors. The Company's ALCO sets liquidity targets
based on the Company's financial condition and existing and projected economic
and market conditions. The ALCO measures the Company's marketable assets and
credit available to fund liquidity requirements and compares the adequacy of
that aggregate amount against the aggregate amount of the Company's interest
sensitive or volatile liabilities, such as core deposits and time deposits in
excess of $100,000, borrowings and term deposits with short maturities, and
credit commitments outstanding. The primary objective is to manage the
Company's liquidity position and funding sources in order to ensure that it has
the ability to meet its ongoing commitment to its depositors, to fund loan
commitments and unused lines of credit, and to maintain a portfolio of
investment securities.
The Company's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 85% of the Company's time deposits will mature within twelve
months, management believes, based upon past experience, (percentage of time
deposits to mature within twelve months has ranged from 72% to 85% over the
preceding eight years) the relationships developed with local municipalities,
and the introduction of new deposit products in 2005, that Union Bank will
retain a substantial portion of these deposits. Management will continue to
offer a competitive but prudent pricing strategy to facilitate retention of
such deposits. The inverted yield curve for the last year and the proliferation
of certificate of deposit specials have contributed to the shortening of the
maturities in time deposits. A reduction in total deposits could be offset by
purchases of federal funds, purchases of deposits, short-or-long-term FHLB
borrowings, utilization of the repurchase agreement line, or liquidation of
investment securities, purchased brokerage certificates of deposit or loans
held for sale. Such steps could result in an increase in the Company's cost of
funds or a decrease in the yield earned on assets and therefore adversely
impact the net interest spread and margin. Management believes the Company has
sufficient liquidity to meet all reasonable borrower, depositor, and creditor
needs in the present economic environment. However, any projections of future
cash needs and flows are subject to substantial uncertainty. Management
continually evaluates opportunities to buy/sell securities and loans
available-for-sale, obtain credit facilities from lenders, or restructure debt
for strategic reasons or to further strengthen the Company's financial
position.
Capital Resources. Capital management is designed to maintain an optimum level
of capital in a cost-effective structure that meets target regulatory ratios;
supports management's internal assessment of economic capital; funds the
Company's business strategies; and builds long-term stockholder value.
Dividends are generally increased in line with long-term trends in earnings per
share growth and conservative earnings projections, while sufficient profits
are retained to support anticipated business growth, fund strategic investments
and provide continued support for deposits.
The total dollar value of the Company's stockholders' equity was $41.7 million
at June 30, 2007, reflecting net income of $2.7 million for the first six
months of 2007, less cash dividends paid of $2.5 million, the purchase of
11,330 shares of Treasury stock totaling $243 thousand, and an increase of $172
thousand in accumulated other comprehensive loss, compared to stockholders'
equity of $41.9 million at year end 2006.
Union Bankshares, Inc. has 7.5 million shares of $2.00 par value common stock
authorized. As of June 30, 2007, the Company had 4,918,611 shares issued, of
which 4,520,647 were outstanding and 397,964 were held in Treasury.
The Board of Directors has authorized the repurchase of up to 100,000 shares of
common stock, or approximately 2.2% of the Company's outstanding shares at the
authorization date, for an aggregate repurchase cost not to exceed $2.15
million. Shares can be repurchased in the open market or in negotiated
transactions. The repurchase program is open for an unspecified period of time.
As of June 30, 2007 the Company had repurchased 11,330 shares under this
program, for a total cost of $243 thousand year-to-date, and 37,016 shares at a
total cost of $785 thousand since the inception of the program in November,
2005.
34
As of June 30, 2007, there were outstanding employee incentive stock options
with respect to shares of the Company's common stock, granted pursuant to Union
Bankshares' 1998 Incentive Stock Option Plan. As of such date, 12,825 options
were currently exercisable but only 3,325 of those options were "in the money".
Of the 75,000 shares authorized for issuance under the 1998 Plan, 45,450 shares
remain available for future option grants. During the second quarter of 2007,
no incentive stock options were granted or exercised pursuant to the 1998 plan.
Union Bankshares, Inc. and Union Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Management believes,
as of June 30, 2007, that both companies meet all capital adequacy requirements
to which they are subject. As of June 30, 2007, the most recent calculation
categorizes Union Bank as well capitalized under the regulatory framework for
prompt corrective action. The prompt corrective action capital category
framework applies to FDIC insured depository institutions such as Union but
does not apply directly to bank holding companies such as the Company. To be
categorized as well capitalized, Union Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below. There are no conditions or events since June 30, 2007, that
management believes have changed either company's category.
Union Bank's and the Company's actual capital amounts and ratios as of June 30,
2007, are presented in the following table:
Minimums
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Requirements Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total capital to risk weighted assets
Union Bank $46,090 17.2% $21,437 8.0% $26,797 10.0%
Company $46,241 17.2% $21,496 8.0% N/A N/A
Tier I capital to risk weighted assets
Union Bank $42,717 15.9% $10,719 4.0% $16,079 6.0%
Company $42,871 16.0% $10,745 4.0% N/A N/A
Tier I capital to average assets
Union Bank $42,717 11.3% $15,081 4.0% $18,851 5.0%
Company $42,871 11.4% $15,082 4.0% N/A N/A
Regulatory Matters. The Company and Union are subject to periodic examinations
by the various regulatory agencies. These examinations include, but are not
limited to, procedures designed to review lending practices, risk management,
credit quality, liquidity, compliance and capital adequacy. During 2006 the
Securities and Exchange Commission, the Vermont State Department of Banking,
the Federal Deposit Insurance Corporation, and the Federal Reserve Bank of
Boston performed various examinations of the Company and Union pursuant to
their regular, periodic regulatory reviews. No comments were received from
these various bodies that would have a material adverse effect on the Company's
liquidity, financial position, capital resources, or results of operations.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information called for by this item is incorporated by reference in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "OTHER FINANCIAL CONSIDERATIONS" on pages 28
through 35 in this Form 10-Q.
Item 4. Controls and Procedures.
The Company's chief executive officer and chief financial officer, with the
assistance of the Disclosure Control Committee, evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
period covered by this report and concluded that those disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files with the Commission is accumulated and communicated
to the Company's management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There are no known pending legal proceedings to which the Company or its
subsidiary is a party, or to which any of their properties is subject, other
than ordinary litigation arising in the normal course of business activities.
Although the amount of any ultimate liability with respect to such proceedings
cannot be determined, in the opinion of management, any such liability would
not have a material effect on the consolidated financial position of the
Company and its subsidiary.
Item 1A. Risk Factors.
There have been no material changes in the Company's risk factors from those
previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2006.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum Number of
Shares that May Yet Be
Total Numbers of Shares Purchased Purchased Under
Total Number of Average Price as Part of Publicly Announced Plans the Plans or
Period Shares Purchased Paid per Share or Programs (1) Programs
------------------------------------------------------------------------------------------------------------------------
April 2007 - $ - - 72,751
May 2007 800 $21.69 800 71,951
June 2007 8,967 $21.38 8,967 62,984
(1) Since November 18, 2005, the Company has maintained an informal stock repurchase program pursuant to which the
Company may repurchase up to $2.15 million or 100,000 shares of common stock, or approximately 2.2% of the
Company's outstanding shares as of the authorization date. Shares can be repurchased in the open market or in
negotiated transactions. The repurchase program is open for an unspecified period of time. As of June 30, 2007 the
Company had repurchased 11,330 shares under this program for a total cost of $243 thousand during 2007. Since
inception of the program, the Company has repurchased 37,016 shares at a total cost of $785 thousand.
36
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on May 16, 2007. Of
4,530,414 shares outstanding on the record date of the meeting (March 30, 2007)
and entitled to vote, 3,883,360 shares were represented in person or by proxy.
Two matters were voted on by the shareholders at the meeting; one was to fix
the number of directors at eight and to elect the following individuals as
directors for the ensuing year:
Nominees Votes Votes Votes Broker
For Withheld Abstained Non-votes
Cynthia D. Borck 3,865,037 11,802 6,521 -
Steven J. Bourgeois 3,875,626 1,213 6,521 -
Kenneth D. Gibbons 3,866,280 10,559 6,521 -
Franklin G. Hovey, II 3,875,636 1,203 6,521 -
Richard C. Marron 3,862,181 14,658 6,521 -
Robert P. Rollins 3,874,803 2,036 6,521 -
Richard C. Sargent 3,874,912 1,927 6,521 -
John H. Steel 3,876,836 3 6,521 -
The second was to approve an amendment to Section 7 of the Company's Amended
and Restated Articles of Association increasing the number of authorized shares
of common stock, $2.00 par value per share, from 5,000,000 to 7,500,000 shares.
There were 3,639,074 votes for, 70,109 votes withheld, 174,174 votes abstained
and 3 broker nonvotes.
Item 6. Exhibits.
3.1 Amended and Restated Articles of Incorporation of Union
Bankshares, Inc. as of May 16, 2007.
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 2007 Union Bankshares, Inc.
/s/ Kenneth D. Gibbons
-------------------------------------
Kenneth D. Gibbons
Director, President and
Chief Executive Officer
/s/ Marsha A. Mongeon
-------------------------------------
Marsha A. Mongeon
Chief Financial Officer and Treasurer
(Principal Financial Officer)
37
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of Union Bankshares, Inc.
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
38